The Washington Post ran a column by someone who thinks so. Okay, maybe he just thinks that CEOs should get this sort of pay, but the same logic could also be used to justfy huge paychecks for firefighters. The story is that superstar CEOs produce extraordinary gains in stock prices. Shareholders should therefore be very happy to give them big paychecks, since these checks still only account for a small fraction of the gains. Well, let's think about the work of firefighters. Of course, most of the time they're sitting around waiting to respond to a call. Most of the calls they respond to end up being relatively mundane, often false alarms or some relatively minor fire that can be easily dealt with. However, sometimes a firefighter runs into a building and saves lives. How much is it worth when a firefighter pulls 2 small kids out of a burning building? Arguably, the firefighter who directly saves lives in this way should be paid an annual salary in the millions of dollars. Of course, firefighters aren't on the CEO pay scale. They get paid up front and the life-risking rescues are just part of the job. Back to CEO land. Stock prices fluctuate hugely for all sorts of reasons. (In the late 90s, calling a company anything "dotcom" carried a huge premium.) To some extent stock gains can be due to the particular skills of the CEO, but in many cases this is clearly not true. How can we distinguish these situations -- there is no easy way (although one obvious step is comparing stock performance to industry-wide indexes). One factor that is obvious is that the shareholders form a diverse constituency that is difficult to unite to contain CEO pay, since the CEOs and their allies on the board are a group of well-organized insiders. (This is the same situation that allows earmarked pork-barrel projects to pass Congress. The cost to the general public of any specific project is relatively limited, while the gains to the member of Congress and the immediate beneficiaries are large.) The best way to fix the problem is make it easier for shareholders to organize to contain CEO pay. There are already extensive government rules for corporate governance. You don't get to just set up a corporation and run it anyway you like. How about amending the rules to require that CEO compensation packages get sent out for shareholder approval at regular intervals? Suppose we also require that only returned proxies get counted (i.e. management cannot count unreturned proxies as supporting its position)? Such measures may or may not contain CEO pay packages, but there don't seem to be any obvious down sides. Barney Frank, the new head of the House Financial Services Committee, has proposed legislation along these lines. It will be interesting to see if it goes anywhere.
--Dean Baker